July 13, 2020 | Hoisington Management Q2 Review and Update

Hoisington Management has published its 2020 second-quarter update and it’s worth the read.  Just the facts in six succinct pages and great charts.  Read Q2 Quarterly Review and Outlook.

A couple of key takeaways, first on central bank asset-buying:

Except for the very short run, the Federal Reserve’s lending operations for the corporate bond market are a negative for economic growth. The BOJ (Bank of Japan), ECB (European Central Bank) and the People’s Bank of China (PBOC) have all been buying corporate debt of failing entities for more than a decade with the BOJ doing so for more than 25 years. These operations have provided a fleeting lift to economic activity, but at the end of the day they resulted in misallocation of credit, poor economic growth and disinflation/deflation. By keeping failing players in the game, this prevents the process Joseph Schumpeter called “creative destruction” as well as “moral hazard”, thereby eliminating these critical factors that make free market economies successful. When central banks sustain failing businesses, resources are tied up in nonproductive firms and therefore unavailable for new firms that can contribute to economic growth.

Economic recovery will be painfully slow under the weight of our global debt:

The pandemic will eventually run its course and when that happens economies will register a noticeable improvement. However, the adverse consequences of an unsurpassed increase in new debt will remain for years to come as there currently exists a record domestic and global debt overhang from previous borrowing. Four great past economists – Eugen Bohm Bawerk, Irving Fisher, Charles Kindleberger and Hyman Minsky – all captured the two-edged nature of debt being an increase in current spending in exchange for a decline in future spending unless the debt generates an income stream to repay principal and interest.

…Considering the depth of the decline in global GDP, the massive debt accumulation by all countries, the collapse in world trade and the synchronous nature of the contracting world economies [an unprecedented 92% in recession in 2020] the task of closing this output gap will be extremely difficult and time consuming.

Danielle Park July 13th, 2020

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